1

OPSM 305 Supply Chain Management

Class 20:

Vendor Managed Inventory

Koç University

Zeynep Aksinzaksin@ku.edu.tr

2

The Bullwhip Effect:Managerial Insights

Exists, in part, due to the retailer’s need to estimate the mean and variance of demand.

The increase in variability is an increasing function of the lead time.

The more complicated the demand models and the forecasting techniques, the greater the increase.

Centralized demand information can reduce the bullwhip effect, but will not eliminate it.

3

Coping with the Bullwhip Effect in Leading Companies

Reduce Variability and Uncertainty- POS- Sharing Information- Year-round low pricing

Reduce Lead Times- EDI- Cross Docking

Alliance Arrangements– Vendor managed inventory– On-site vendor representatives

4

Barilla SpA

5

Barilla SpA Part A

Barilla SpA is the world’s largest pasta manufacturer

The company sells to a wide range of Italian retailers, primarily through third party distributors

During the late 1980s, Barilla suffered increasing operational inefficiencies and cost penalties that resulted from large week-to-week variations in its distributors’ order patterns

6

7

Distribution

Factories25

CDC2

Depots18

GD DO

Zincir Mağazalar Bağımsız marketler Signora Maria (Bakkal)

%3545% of dry products

14 days stock

%20

10 days stock12 days stock

150 SKU

800 SKU

14 days stock

Ord

er

deliv

ery

24

-48

hrs

%65 %35

%90

%10

8

Warehouse

Distributors

Warehouse

OD

GD

Depots

Independent Markets

C D C

Fresh

Dry

Daily Orders

24-48 hours

Signora Maria

(Bakkal)Chains

8-10 days

Ordering Process

9Exhibit 12 Weekly Demand for Barilla Dry Products from Cortese’s Northeast Distribution Center to the Pedrignano CDC, 1989.

What is driving this order pattern?

10

Causes for Demand Fluctuations

Transportation discounts

Volume discount

Promotional activity

No minimum or maximum order quantities

Product proliferation

Long order lead times

Poor customer service rates

Poor communication

11

How does Barilla compare to the beergame?

12

What is the impact of fluctuations?

Because of high product changeover: either inefficient production or excess finished goods inventory,

Inventory costs: finished goods yet also stockouts due to unexpected peaks in certain SKUs

Utilization of central distribution low, yet need to be prepared for fluctuations

Transportation costs high due to variability in demand for trucking

Excess capacity at distributor due to need to store items bought during promotions

13

Impact of Bullwhip in general

High inventory/lost sales/backlog cost Low customer satisfaction Low operational efficiency

- underutilization- overtime- expediting

Unnecessary capacity investment Swings in working capital Blaming others; frustration, helplessness

14

JITD

To address this problem, the director of logistics suggests the implementation of Just-in-Time Distribution (JITD), with Barilla’s distributors.

Under the proposed JITD system, decision-making authority for determining shipments from Barilla to a distributor would transfer from the distributor to Barilla.

Specifically, rather than simply filling orders specified by the distributor, Barilla would monitor the flow of its product through the distributor’s warehouse, and then decide what to ship to the distributor and when to ship it.

15

Basic premise of JITD

Replace Sequential optimization with Global optimization

– Who will optimize?

Eliminate some of the ‘false’ economics that drive traditional ordering processes

16

Strategic Partnering

Types of SP:

Quick Response: Vendors receive POS data from retailers, and use this information to synchronize production and inventory activities at the supplier. In this strategy, the retailer still prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.

17

Strategic Partnering

Continuous Replenishment: Vendors receive POS data and use it to prepare shipments at previously agreed upon intervals to maintain agreed to levels of inventory.

– Wal-Mart

Advanced Continuous Replenishment: Suppliers may gradually decrease inventory levels at the retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.

18

Strategic Partnering

Vendor Managed Inventory (VMI):JITD

– VMI Projects at Dillard Department Stores, J.C. Penney, and Wal-Mart have shown sales increases of 20 to 25 percent, and 30 percent inventory turnover improvements.

19

Requirements for Effective SP

Advanced information systems

Top management commitment

Mutual trust

20

Main Characteristics of SP

CriteriaTypes

DecisionMaker

InventoryOwnership

New SkillsEmployed by vendors

QuickResponse

Retailer Retailer Forecasting Skills

ContinuousReplenishment

Contractually Agreedto Levels

EitherParty

Forecasting &Inventory Control

AdvancedContinuous

Replenishment

Contractually agreedto & ContinuouslyImproved Levels

EitherParty

Forecasting &Inventory Control

VMI Vendor EitherParty

RetailManagement

21

22

23

24